Mortgage rates today, May 7, 2018, plus lock recommendations

What’s driving current mortgage rates?

Mortgage rates today opened unchanged from Friday morning. There are no pertinent economic releases today, but the financial data below have moved considerably, and most point to higher rates. And of course, interest rates depend on speculation about political instability in the world — uncertainty and fear push rates lower.

Financial data affecting today’s mortgage rates

The main indicator that concerns me about future rates is oil price increases. Prices were below $50 a barrel about six months ago; now they’re hitting $70. That should concern anyone who doesn’t own an oil company.

Major stock indexes opened higher this morning (bad for mortgage rates)

Gold prices remained at $1,314 an ounce. (That is neutral for mortgage rates. In general, it’s better for rates when gold rises, and worse when gold falls. Gold tends to rise when investors worry about the economy. And worried investors tend to push rates lower)

Oil prices rose $1 to $70 a barrel (bad news for mortgage rates, because higher energy prices play a large role in creating inflation. Prices were under $50 a barrel just 6 months ago)

CNNMoney’s Fear & Greed Index rose 9 points to 44 (out of a possible 100). That means we’re solidly in the “neutral” range. Moving into a less fearful state is usually bad for rates. “Fearful” investors generally push bond prices up (and interest rates down) as they leave the stock market and move into bonds, while “greedy” investors do the opposite.

Friday: Consumer Sentiment for May (economists anticipate a 1 point decrease to 98.7)

Rate lock recommendation

Rates are rising overall, though we are holding steady this morning. I would lock if I were closing any time soon. If my closing date was further out than 30 days, and I could lock without an upfront charge, I’d consider doing that as well.

In general, pricing for a 30-day lock is the standard most lenders will (should) quote you. The 15-day option should get you a discount, and locks over 30 days usually cost more. If you can get a better rate (say, a .125 percent lower rate) by waiting a couple of days to get a 15-day lock instead of a 30, it’s probably safe to consider.

In a rising rate environment, the decision to lock or float becomes complicated. Obviously, if you know rates are rising, you want to lock in as soon as possible. However, the longer you lock, the higher your upfront costs. If you are weeks away from closing on your mortgage, that’s something to consider. On the flip side, if a higher rate would wipe out your mortgage approval, you’ll probably want to lock in even if it costs more.

If you’re still floating, stay in close contact with your lender, and keep an eye on markets.

Video: More about mortgage rates

What causes rates to rise and fall?

Mortgage interest rates depend on a great deal on the expectations of investors. Good economic news tends to be bad for interest rates because an active economy raises concerns about inflation. Inflation causes fixed-income investments like bonds to lose value, and that causes their yields (another way of saying interest rates) to increase.

For example, suppose that two years ago, you bought a $1,000 bond paying five percent interest ($50) each year. (This is called its “coupon rate.”) That’s a pretty good rate today, so lots of investors want to buy it from you. You sell your $1,000 bond for $1,200.

When rates fall

The buyer gets the same $50 a year in interest that you were getting. However, because he paid more for the bond, his interest rate is now five percent.

Your interest rate: $50 annual interest / $1,000 = 5.0%

Your buyer’s interest rate: $50 annual interest / $1,200 = 4.2%

The buyer gets an interest rate, or yield, of only 4.2 percent. And that’s why, when demand for bonds increases and bond prices go up, interest rates go down.

When rates rise

However, when the economy heats up, the potential for inflation makes bonds less appealing. With fewer people wanting to buy bonds, their prices decrease, and then interest rates go up.

Imagine that you have your $1,000 bond, but you can’t sell it for $1,000 because unemployment has dropped and stock prices are soaring. You end up getting $700. The buyer gets the same $50 a year in interest, but the yield looks like this:

$50 annual interest / $700 = 7.1%

The buyer’s interest rate is now slightly more than seven percent. Interest rates and yields are not mysterious. You calculate them with simple math.

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